Israel today lifted its virtual house arrest of Palestinian leader Yasser Arafat, allowing him to move freely around the West Bank and Gaza for the first time in three months.

But Palestinians said the move was of little significance, as Israeli troops again rounded up young men in their search for suspected militants and weapons.

"What is needed from the Israeli government is to stop immediately its crimes and massacres against the Palestinian people and to end the closure that all the Palestinian people have been living under," said Palestinian Information Minister Yasser Abed Rabbo.

Five Palestinians were killed today as Israeli tanks and soldiers stormed refugee camps in the West Bank.

Israeli Prime Minister Ariel Sharon's decision to lift the restrictions on Arafat came after Palestinian security forces arrested the last of five suspects in the October assassination of hard-line Israeli Tourism Minister Rehavam Zeevi.

Sharon's foreign policy adviser, Danny Ayalon, said Arafat will still need Israeli approval to travel abroad. Arafat wants to attend an Arab summit in Beirut, Lebanon, later this month.

Israeli officials said permission would not be granted automatically. "A lot will depend on the situation at the time," said Sharon advisor Raanan Gissin .

"If there are puddles of blood everywhere, it will make a difference," Gissin said, referring to a recent string of attacks on Israelis by Palestinian militants.

Arafat's mobility is considered key to an emerging Arab peace initiative -full peace with Israel for a full Israeli withdrawal from occupied lands - that is to be presented at the Beirut summit. Palestinian officials said they have been assured the plan would not be raised in Arafat's absence.

Sharon's move comes ahead of the arrival of US peace envoy Anthony Zinni. US Secretary of State Colin Powell said he was prepared to send a small number of US monitors to the Middle East, along with Zinni, to supervise a truce deal.

Ayalon said Israel had no objection to a limited number of American observers, but Israel has blocked Palestinian demands for a large contingent of international monitors.

Sharon also said he was dropping his demand for a full seven days without violence before beginning formal truce talks.

The gestures toward the Palestinians appeared likely to cost Sharon the support of the most hawkish wing of his coalition government. Tourism Minister Benny Elon of the National Union bloc said he and fellow minister Avigdor Lieberman would submit their resignations from Sharon's ruling team tomorrow.

Palestinian officials said they were sceptical of Sharon's motives, and demanded more decisive US intervention. "The Americans should order Sharon to stop the war against the Palestinian people," said Rabbo.

Israel pressed its military offensive against the Palestinians today, just hours after a Palestinian gunmen opened fire on a coming-of-age party in the Israeli port town of Ashdod. A 13-year-old boy was wounded before the assailant was captured.

Today, dozens of Israeli armoured vehicles entered the West Bank town of Qalqilya and helicopters fired missiles at several security installations and an office of the Popular Front for the Liberation of Palestine, a radical PLO faction.

Two people, a policeman and a civilian, were reported killed and five wounded in the fighting.

Near the town of Yatta, Israeli soldiers opened fire on a car at a road block, killing a 17-year-old boy and wounding three other passengers, said a witness.

In Gaza, Israeli troops shot and killed a Palestinian man near the border, the army said. In the Bureij refugee camp, Israeli troops exchanged fire with Palestinian security forces, and a Palestinian civilian was killed, doctors said.

Israeli troops also moved deeper into the Dheisheh refugee camp near Bethlehem. All men between the ages of 15 and 45 were ordered to report to a factory on the outskirts of the camp.

More than 200 men stood in line today, their hands on their heads and stripped to the waist. Elsewhere in the yard, others had already been handcuffed and blindfolded.